Morgan Stanley said the recent plunge in the KOSPI represents a temporary correction rather than a trend reversal. The firm projected that the index could climb to 10,500 in a bull-market scenario, citing still-solid fundamentals for memory chip and artificial intelligence (AI) related stocks.
According to the financial investment industry on Monday, Morgan Stanley said in a report released the previous day that "the KOSPI's sharp drop on the 23rd is closer to a temporary breather than a breakdown."
The report cited weakness in Micron's share price and unfavorable policy-related remarks as the backdrop for the KOSPI's 10% plunge the previous day. It noted in particular that Korea's stock market saw a steeper decline than Japan's TOPIX (-1.3%) and Taiwan's TAIEX (-2.6%), owing to its high weighting in memory chips and its sensitivity to policy news.
Morgan Stanley pointed to accumulated fatigue from a prolonged rally as the reason Korea's market underwent a particularly large correction. However, it assessed that the underlying strength of memory chip and AI-related stocks remains solid. "Companies in the memory chip and AI value chain are still positioned at key bottleneck points," the report said, adding that "a situation in which AI demand exceeds supply continues to persist."
"We do not view this correction as the start of a bear market," the report said. "We judge it to be a natural correction that emerged in the process of waiting for clearer signals on policy direction and the AI investment story."
Morgan Stanley cited market reactions following the Micron and Nvidia shareholder meetings and second-quarter earnings releases by domestic semiconductor companies as key variables for the market going forward. It added that it maintains a positive view on semiconductor companies, related holding companies, and AI-beneficiary tech stocks.
The firm set a KOSPI target of 9,000 in its base scenario. It projected 10,500 in a bull-market scenario and as low as 6,500 in a bear-market scenario.
However, it expected market volatility to widen for the time being. "Market volatility has entered an expansionary phase," the report said. "The diversification of products and the broadening of the investor base bring the positive effect of increased liquidity, but at the same time are factors that amplify volatility."
Accordingly, it forecast that the KOSPI would continue to see substantial swings even after the correction.
As an investment strategy, the firm proposed a barbell approach. It explained that while maintaining a growth-stock-centered portfolio, investors should also increase their weighting in relatively defensive sectors such as financials, defense, healthcare, and premium consumer goods.
